17/09/2022

Project Management Fundamentals

(On-the-job Training 01)

Session 6:
Project COSTS Management

Presented by: Prof. Roque Senga, IntPE, Eur Ing, IPMA-B

Chairman, IPMA Philippines
CEO, RS Management Education & Training Services

Copyright Materials

“Reproduction, distribution, display and use of the

presentation without written permission of RSPMCTS
& IPMA Philippines is prohibited”.

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Click to edit Master title style

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Project Cost Management

• Processes involved in planning, estimating,
budgeting, and controlling costs so that the project
can be completed within the approved budget.
• Key Activities:
1. Estimate Costs
2. Determine Budget
3. Control Costs

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Work Breakdown Structure (WBS)

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Project Costs Management

• It is primarily concerned with the cost of the
resources need to complete project activities.
• It is critical for the PM to know how to cost
the project.

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Estimate Costs

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Quantity Surveyor/Estimator

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Gulf Talent - Salary Range (UAE)

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Bahrain Licensed QS

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QS/Cost Engineer/Estimator

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QS/Cost Engineer/Estimator

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Basic Costs Terms

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WHAT IS COST?
• Cost is a basic “yard stick” by which activities and
assets are measured and compared.
• Cost is one of the three fundamental attributes
associated with performing an activity or the
acquisition of an asset. These are (1) price (cost),
(2) features (performance), and (3) availability
(schedule).
• Cost is the value of an activity or asset.

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CONCEPTS
• Cost is the value of an activity or asset.
• Resources used are categorized as follows:
• Equipment
• Labor
• Material
• Others

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COST STRUCTURING
• It is important to get a better understanding
on how to control the costs.
• In practice, some costs may fall in more than
one of these groupings:
• Direct Costs
• Indirect Costs
• Fixed Costs
• Variable Costs

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WHAT IS DIRECT COSTS?

• Direct Costs are those resources that are
expended solely to complete the activity or
asset.
• Cannot be shared among other projects.

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WHAT IS INDIRECT COSTS?

• Indirect costs are those resources that need
to be expended to support the activity or
asset, but are also associated with other
activities and assets.
• Overhead costs or burden costs.

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WHAT IS FIXED COST?

• Examples fixed salary, Office Rent, Rented Crane
for a fixed period of time, etc.
• Fixed costs are those cost elements that must be
provided independent of the volume of work
activity or asset production that they support.
• These can be either direct or indirect costs.
• Expenses whose total does not change in
proportion to the activity of a project, within the
relevant time period or scale of production.

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WHAT IS VARIABLE COSTS?

• Expenses that change in proportion to the activity
of a business or project i.e. water & electricity,
etc.
• Variable costs are those cost elements that must
be provided and are dependent on the volume of
work activity or asset production that they
support.
• These can be either direct or indirect costs.

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COST ACCOUNTING
• Cost accounting is defined as the historical
reporting of disbursements, costs, and
expenditures on a project. When used in
conjunction with a current working estimate,
cost accounting can assist in giving the
precise status of the project to date.
• Historical costs can also provide a sound basis for
forecasting and budgeting costs of future
activities and assets.

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COST ACCOUNTING
• Every business enterprise has an established
approach for classifying and summarizing costs
that is organized around their business practices.
• This approach is called a of “code accounts” by
which all recorded cost elements are classified.
• A code of accounts (sometimes referred to as a
chart of accounts or as cost code of accounts) is a
systematic numeric method of classifying various
categories of costs.

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COST ACCOUNTING
• Code of Accounts can be presented as follows”
• Example
ü2000 Assets
ü3000 Liabilities
ü4000 Equity
ü5000 Revenues
ü6000 Expenses

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COST ACCOUNTING
• Another approach to classifying costs that is
similar to ABC or Work Breakdown Structure
(WBS) approach.

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COST ESTIMATING
• Cost Estimating predicts the quantity and cost of
resources needed to accomplish an activity or
create an asset.
• The building blocks of a cost estimate are:
• A well-defined scope (what we are trying to
estimate),
• A cost element structure (how we organize the
information),
• Historical cost data

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COST FORECASTING
• Forecasts are much like estimates. An estimate is
always for future activities and assets, and
establishes the Budget at Completion (BAC) for
performance baselines; whereas forecasts are
predictions of the cost to complete or Estimate to
Complete (ETC) for cost elements in progress, or
that have not started.

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LIFE-CYCLE COSTING
• Life-Cycle Costs (LCC) are associated with an
asset, and they extend the cost management
information beyond the acquisition (creation)
of the asset to the use and disposal of the
asset.

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COSTING VS. PRICING

• Pricing can be defined as the determination of
the amount to be charged to the client, so as to
fully include everything necessary to provide a
service or product, plus profit.
• In the cost estimating process, costing follows
scope determination and quantification and
precedes pricing and budgeting.

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COSTING VS. PRICING

Project SOW ( Scope of Work) Cost $ 1,000,000

Field Office Overheads (6%) $ 60,000
Home Office Overheads (10%) $ 100,000
Project Cost Sub Total $ 1,160,000
Contingency (5%) $ 58,000
Project Total Cost $ 1,218,000
Profit (10%) $ 121,800
Project Total Price $ 1,339,800

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COSTING-PRICING PROCESS

Inputs Transforming Mechanism Outputs

(Tools and Techniques)

•WBS/Scope •Costing and Pricing •Project Estimate

•Historical Records Strategies •Project Acquisition
•Quotations •Financial Management •Business Decision
•SOW (Contracts)

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LABOR CLASSIFICATIONS
• Direct Labor
• The labor involved in the work activities that
directly produce the product or complete the
installation being built.
• Indirect Labor
• The labor needed for activities which do not
become part of the final installation, product, or
goods produced but that are required to complete the
project.
• Overhead Labor
• The labor portion of costs inherent in the
performing of a task (such as: engineering,
construction, operating, or manufacturing), which
cannot be charged or identified with a part of the
work.
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ESTIMATE ACCURACY

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ESTIMATE CLASSIFICATION

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ESTIMATE CLASSIFICATION

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Quantity Survey

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Quantity Survey
• A thorough systematic breakdown approach
in measuring of the quantities/units of work
for the purpose of evaluating the time and
costs to construct.

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Pre-QS Check-up/Review
• Instruction to Bidders
• Technical Specifications & Standards
• General & Special Conditions
• Proposal Forms

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Guidelines on Client Bid Quantities

• Never assume that quantities given by Client can be

used for purchasing materials or for costing of the
work.
• Quantities must be provided for costing each
element of the work, including:
• Materials to be procured (permanent/
temporary)
• Labor
• Construction Equipment
• Services or other items

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Principles of Quantity Surveying

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Principles of Quantity Surveying

1. Selected Construction Method
2. Estimation Norms & Forms
3. Quantifying to industrial standards
• Commercial weight, dimensions, etc.
4. Allowance for Waste
5. Accuracy of Quantities
6. Prevention of mistakes

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Practical Tips:
• QS must have complete set of bidding
documents.
• Acquainted with company estimating
norms & forms to be used
• Use Work Breakdown Structure (WBS)
• Establish good checking procedure
• More attention to be given on expensive
items

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Determine Budget

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Released by
M anagem ent

Costs Estim ate

Errors on W P
Costs Estim ate
Errors (QS)

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Simplified Earned Value Management

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1. EV Simplified Concept
Our contractor is going to build a perimeter fence.
The cost of supply & installation of fence is $10.00.

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1. EV Concept
He has installed15 meter. How much value has he
earned?
15 mtr x $10.00/mtr = $150.00
Note that this is totally independent of how much
time was spent or how much money we had
budgeted for it.

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1. EV Concept
If the contractor was supposed to installed 20
meter fence by this point, he’s behind schedule.
because he installed only 15 instead of 20.
If he installed 15 meter fence for actual cost of
$125, he’s ahead of budget because we had
planned to spend $150 by this point.
Earned Value gives us its benefits when we
compare the actual amount of work done with the
baseline plan.

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2. EV Simplified Concept
A contractor is going to put up 12 houses at the
rate of one per month for $100,000 per house or a
budget of $1,200,000.

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2. EV Simplified Concept
After 1 month, the contractor has spent $100,000 and completed 1
house. At this time he is on schedule and on budget. What are the
AC, PV, EV, SV, CV, SPI & CPI ?
Actual Cost = $100,000
Planned Value = $100,000
Earned Value = $100,000
SV= EV-PV = $100K-$100K = 0
CV= EV-AC = $100K-$100K = 0
SPI = EV+PV = $100K/$100K = 1
CPI = EV+AC = $100K/$100K = 1

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2. EV Simplified Concept
During month 3 something happened and the
contractor did not complete the house. He spent
$50,000 on the third house but did not complete it.
Actual Cost: $250,000
Planned value: $300,000
Earned value: $200,000

What are the SV, CV, SPI & CPI ?

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2. EV Simplified Concept
¨ What are the SV, CV, SPI & CPI ?
Actual Cost: $250,000
Planned value: $300,000
Earned value: $200,000
SV= EV-PV = $200K-$300K = -$100K
CV= EV-AC = $200K-$250K = -$50K
SPI = EV+PV = $200K/$300K = 0.67
CPI = EV+AC = $200K/$250K = 0.80
For every day he works, he gets 2/3 of a day worth of value.
For every dollar he spends, he gets 80 cents worth of value.

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2. EV Simplified Concept
At the end of month 2 we would have predicted that
the project would finish on schedule based on
progress to date.
At the end of month 3, we can now calculate that
this 12 month project will take 18 months.
Planned Schedule/SPI = 12/0.67 = 18 Mos.

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2. EV Simplified Concept
At the end of month 3, we can now calculate that
Estimate at Completion (EAC) is $1.5M.
EAC = BAC/CPI = $1.2M/0.80 = $1.5M

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How do I get started using

Earned Value Management?
1. Identify all tasks that need to be accomplished and
organize the tasks into subgroups.
2. Each activity in the project should have a planned
Budget-at-Completion (BAC). All subsequent
earned value calculations will be based on this
amount.
3. In addition to the BAC, each task should also have a
specific duration.

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How do I get started using

Earned Value Management?
4. As the project progresses, the percent complete for
unfinished tasks should be updated and
monitored.
5. Earned Value (EV) is determined by relating this
physical progress to the BAC. Along with task status
and budget, it is necessary to maintain actual costs
accrued for each task in order to calculate cost
performance.

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Quiz Time

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1. Cost estimating should be performed:

A. Before the work breakdown structure is
created and before the budget is developed.
B. Before the work breakdown structure is
created and after the budget is developed.
C. After the work breakdown structure is
created and before the budget is developed.
D. After the work breakdown structure is
created and after the budget is developed.
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1. Cost estimating should be performed:

A. Before the work breakdown structure is created and
before the budget is developed.
B. Before the work breakdown structure is created and
after the budget is developed.
C. After the work breakdown structure is created and
before the budget is developed.
D. After the work breakdown structure is created and
after the budget is developed.
The correct answer is C.
Most of the planning processes have a logical order to them, and this question
relies on an understanding of that. The work breakdown structure has to be created
before cost estimates are performed, and the cost estimates have to be created
before the budget. This should make sense when you stop to consider it.

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2. All of the following are needed for creating the

project budget except:
A. Activity cost estimates.
B. Work breakdown structure.
C. Cost management plan.
D. Deliverables

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2. All of the following are needed for creating the

project budget except:
A. Activity cost estimates.
B. Work breakdown structure.
C. Cost management plan.
D. Deliverables

Correct answer is D.
The project’s deliverables would not be produced
before the budget had been created.
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3. You might used all of the following when creating

the project budget EXCEPT:
A. Cost baseline
B. Activity cost estimates
C. The WBS
D. The contract

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3. You might used all of the following when creating

the project budget EXCEPT:
A. Cost baseline The correct answer is A.
B. Activity cost estimates The output of this process is the cost baseline -
it's not an input. So, 'A' is correct. The other 3
C. The WBS are inputs to this process. We'll use the cost
estimates produced in the prior process - they
D. The contract drive the budget. The WBS helps define the
scope and deliverables of the project, so we
might use it in budgeting. And the contract
could specify payments tied back to deliveries
or milestones - again, impacting the budget.

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IPMA Phillipines YT Channel

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